2016 AICPA HeathcareIndustry Conference Session 10 –FASB … · 2016. 11. 14. · #AICPAhealth...
Transcript of 2016 AICPA HeathcareIndustry Conference Session 10 –FASB … · 2016. 11. 14. · #AICPAhealth...
#AICPAhealth
2016 AICPA Heathcare Industry Conference
Session 10 – FASB UpdateJeffrey D. Mechanick, CPA, CGMA, MBA
The views expressed in this presentation are those of the presenter. Official positions of the FASB are reached only after extensive due process & deliberations
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Speaker Biography – Jeffrey D. Mechanick [email protected] (203) 956-5301
Jeff Mechanick is Assistant Director for Nonpublic Entities at the Financial Accounting Standards Board (FASB). In that role, he provides strategic and technical oversight of all activities involving private companies and not-for-profit organizations (NFPs). Jeff chairs the FASB Not-for-Profit Advisory Committee, and oversees staff support for the Private Company Council. He also represents the FASB on the NFP Issues Working Group of the International Forum of Accounting Standard Setters.
He was the overall lead staff person for the Blue-Ribbon Panel on Standard Setting for Private Companies, which was jointly sponsored by the Financial Accounting Foundation, the AICPA, and the National Association of State Boards of Accountancy. He was also the overall lead staff person for the FASB’s and IASB’s Financial Crisis Advisory Group.
Prior to joining the FASB, Jeff spent a combined twenty years working in and with the not-for-profit sector, as the chief financial officer of Planned Parenthood Federation of America, Inc., and before that, as a senior audit manager with KPMG, LLP.
Jeff earned a Bachelor of Arts degree in biological sciences from The University of Chicago and an MBA in professional accounting from Rutgers – The State University of New Jersey. He is a member of the AICPA and the New York State Society of CPAs, and has served on the AICPA’s NFP Expert Panel.
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Agenda
Revenue Recognition
Leases
NFP Financial Statements
Other Recent ASUs and Ongoing Projects
Agenda Consultation
Q&A
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How I Imagined the FASB 11 Years Ago…
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Current FASB Agenda
Tech
nica
l Age
nda
FoundationalConceptual Framework: Measurement & Presentation
Disclosure Framework: Board’s Decision Process
Recognition & Measurement
Narrow: Goodwill; Definition of a Business; Partial Sales of Nonfinancial Assets; NFP GP Consolidation; Liabilities & Equity—Targeted Improvements; Nonemployee Share-Based Payment;
Interest Income Associated with Callable Debt; Revenue Recognition of Grants and Contracts by NFPs; Determining the Customer in Service Concession Arrangements
Broad: AFI—Hedging; Insurance—Long-Duration Contracts
Presentation & Disclosure
Disclosure Framework: Entity’s Decision Process; Disclosure Reviews of: Fair Value, Defined Benefit Plans, Income Taxes, and Inventory; Interim Reporting
NFP Financial Statements (phase 2); Government Assistance to Business Entities; Net Periodic Postretirement Benefit Cost; Classification of Debt; Employee Benefit Plan
Master Trust; Restricted Cash
ResearchAgenda
Interest Rate Disclosures; Financial Performance Reporting; Presenting Tax Expense/Benefit; VIE Guidance for Entities Under Common Control; Consolidation; Liabilities v. Equity; Intangible Assets; Inventory and COGS; Pensions ; Identifiable
Intangibles
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Note: Agenda as of November 2016; details on each project available on FASB website (see Technical Agenda tab). Agenda includes EITF and PCC projects.
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Revenue Recognition
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Revenue Recognition: contracts with customers (Topic 606)
The revenue standard aims to improve accounting for contracts with customers by:
Providing a robust framework for
addressing revenue issues as they arise
Increasing comparability across industries and capital
markets
Requiring better disclosure
Objective: To develop a single, principle-based revenue standard for US GAAP and IFRS
Substantially converged with IFRS on major provisions
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Rev. Rec. – Scope
Lease contractsInsurance contractsFinancial instrumentsGuaranteesNon-monetary exchanges in the same line of business to facilitate sales to
customers
All contracts with customers, except
• Contributions• Collaborative arrangements
Contracts not with customers are excluded:
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Rev. Rec. – Model
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Core Principle:
Steps to apply the core principle:
1. Identify the contract(s) with the customer
2. Identify the performance obligations
3. Determine the transaction price
5. Recognize revenue when (or as) a performance obligation is satisfied
4. Allocate the transaction price
Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
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• Qualitative and quantitative* disaggregation of revenue into categories that depict how revenue and cash flows are affected by economic factors
Remaining performance obligations
Interim requirements
Information about contract balances
• Quantitative disclosures *
• Opening and closing balances * • Amount of revenue recognized from contract liabilities * • Explanation of significant changes in contract balances *
• Transaction price allocated to remaining performance obligations *
• Quantitative or qualitative explanation of when amounts will be recognized as revenue *
Disaggregation of revenue
Rev. Rec. – Disclosures
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* Optional for nonpublic entities
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Rev. Rec. – Effective Date
Original effective dates• CY 2017 (FY 2017-18) for public entities* (including interim)• CY 2018 (FY 2018-19) for nonpublic entities (no interim, just annual period; interims in
subsequent years)• Nonpublic entities may adopt early, but no earlier than public entities
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Deferred effective dates (via ASU 2015-14)- CY 2018 (FY 2018-19) for public entities* (including interim)- CY 2019 (FY 2019-20) for nonpublic entities (no interim, just annual period; interims in
subsequent years)- Early adoption permitted, but not before original effective date
* Public entities include NFPs with publicly-traded conduit (or direct) debt
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Rev. Rec. – Recent ASUs (following discussions with TRG)
Identifying Performance Obligations and Licensing1
• Performance Obligations• Distinct in the context of the
contract• Immaterial promises• Shipping and handling
• Licensing• Nature of license: over time vs.
point in time• Scope of constraint on sales-
based and usage-based royalties
Principal versus Agent (Reporting Revenue Gross
versus Net)2
• Control principle: to provide (principal) vs. to arrange (agent)
• Unit of account• Control principle in the context of
services• Control indicators• Illustrative examples
Narrow-Scope Improvements and Practical
Expedients3
• Narrow-Scope Improvements• Noncash consideration• Collectibility• Completed contracts at
transition• Practical Expedients
• Contract modifications at transition
• Sales tax presentation (net)
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1ASU 2016-10 (issued April 2016)2 ASU 2016-08 (issued March 2016)3 ASU 2016-12 (issued May 2016)
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Rev. Rec. of Grants and Contracts by NFPs
Project now on the FASB’s Technical Agenda to improve and clarify existing guidance (referred to us by the AICPA)
Long-standing diversity in practice in classifying grants and contracts, particularly from governmental entities• Issue 1: Reciprocal vs. Nonreciprocal• Issue 2: Conditions vs. Restrictions
ASU 2014-09, Topic 606 (Revenue from Contracts with Customers) heightened the issue, including the related disclosures• Raised question as to whether grants and contracts are in scope of that guidance (reciprocal or nonreciprocal)
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Direct Commensurate
Value to Resource Provider
General Public
Direct Commensurate Value to Resource
Provider
Specified Third PartiesGovernment /ResourceProvider is 3rd Party Payer on Behalf of theCustomer *
General Public
Specified Third Parties
EXCHANGE
EXCHANGE NONEXCHANGE
Current Practice
Proposed Clarification
Issue 1: Exchange versus NonexchangeWho receives the benefit?
Follow Topic 958-605
Continue to monitor GASB and IPSASB
projects in this area**
Follow Topic 606 (or other, such as Leases) *The revenue recognized would actually be the underlying contract’s patient service revenue, tuition revenue, etc.
**A focus on whether or not there is a “performance obligation” could even ultimately include some contracts where the general public is the primary beneficiary.
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Issue 2: Conditions versus RestrictionsWhat is conditional?
Outside an NFP’s Control
Hurdle to Entitlement(Other than
Trivial)Objective
Current Practice for many Proposed Clarification
Interpretation of “Remote”
Within an NFP’s Control
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Rev. Rec. of Grants and Contracts by NFPs
Improvements likely to include:
Clarification of definitions/ underlying principles
Refinement of indicators
Better/ more extensive examples
Flowchart
Terminology and Transition
While contribution include both donations and certain grants, will take the opportunity to reexamine terminology to see if that can be improved
Looking at this as a reset to the system: a change in classification in connection with enhanced/clarified guidance would not be the correction of an accounting error
Currently anticipate issuing an Exposure Draft in late Q1/ early Q2 2017
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Rev. Rec. – Some Other Areas of Focus for NFPs Discussed by AICPA Task Forces
Contributions• TRG: not in scope• Grants: referred to FASB (previous slides)
Tuition and Fees
Membership Dues
Health Care: various issues, including:• Self-pay patients• Medicare/Medicaid payments (and subsequent audits)• Continuing Care Retirement Communities: entrance and other fees
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Healthcare: Rev. Rec. for Self-Pay Patients
Current practice• Gross charges, net of self-pay discounts recorded as contractual adjustments• Bad debt expense recorded and presented separately as a reduction to net patient service revenue
New guidance• Record revenue at amount entity expects to be entitled to (i.e., net patient service revenue) – in many
cases much lower• Implicit Price Concessions (Example 3 in ASU 2014-09)• Portfolio Approach (sufficiently homogeneous groups; good historical data; also important for
estimating Medicaid-pending amounts)• Bad debt expense presented as operating expense – in many cases much lower• Use of judgment in determining what constitutes bad debt versus implicit price concessions
No change in charity care guidance
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Leases
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Leases (ASU 2016-02; Topic 842)
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A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration
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Lessee Model
Current U.S. GAAP (IFRS) IASB FASBCapital (Finance) Leases Type A Type A
Operating Leases Type A Type B
All leases are accounted for the same.
Classification is based on existing U.S. GAAP/IFRS
All leases (more than 12 months) are recognized on the lessee’s balance sheet
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Lessee Accounting Overview
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Finance(“Type A”)
Operating(“Type B”)
Right-of-use (ROU) asset
Lease liability
Amortization expenseInterest expense
Cash paid for principal and interest
payments
Right-of-use (ROU) asset
Lease liability
Single lease expense on a straight-line basis
Cash paid for lease payments
Income Statement Cash Flow StatementBalance Sheet
Classification is similar to the classification in Topic 840
Recognition and measurement exemption for short-term leases
Other than public business entities may use risk-free rates for measurement of all lease liabilities
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Identifying a Lease (The new primary determinant for on/off balance sheet treatment)
Lease contracts in the scope of Topic 842 involve
An identified asset
That is explicitly or implicitly specified
Supplier has no practical ability to substitute and would not economically benefit from substituting
the asset
The right to control the use during the lease term
Decision-making authority over the use of the asset
The ability to obtain substantially all economic
benefits from the use of the asset
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Lessor Accounting Overview
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Sales-Type & Direct Financing
Operating
Net investment in the lease
Interest income and any selling profit on the lease1
Cash received for leases
Continue to recognize underlying asset
Lease income, typically on a straight-line basis
Cash received for leases
Income Statement Cash Flow StatementBalance Sheet
Classification is similar to the classification in Topic 840
1 Selling profit is recognized at lease commencement for sales-type leases and over the lease term for direct financing leases (note: selling profit is rare for direct financing leases)
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Sale and Leaseback Transactions
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Determine if a sale occurred
Apply Topic 606 If there is a sale, apply Topic 842 to account for leaseback Finance leasebacks preclude a sale Repurchase options do not preclude a sale if exercisable at the then-prevailing
fair value, provided there are alternative assets (that are substantially the same as the transferred asset) readily available in the marketplace
Accounting for the sale / purchase
Gain or loss on sale is recognized same as for the sale of any other nonfinancial asset
Buyer-lessor accounts for purchase consistent with that of other nonfinancial assets
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Leases – Effective Date
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• Fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (CY 2019; FY 2019-20)
Public Companies*
• Fiscal years beginning after December 15, 2019 and interim periods beginning after December 15, 2020 (CY 2020; FY 2020-21)
All Other Organizations
• Permitted for all organizations
Early Application
* “Public Companies” refers to the following: (1) public business entities, (2) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an-over-the-counter market, and (3) an employee benefit plan that files or furnishes statements with or to the SEC (Same Here as Revenue Recognition Standard)
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NFP Financial Statements
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ASU No. 2016-14, Presentation of NFP Financial Statements
Project Objective: simplify and improve how an NFP classifies its net assets, as well as the information it presents in financial statements and notes about its liquidity, financial performance, and cash flows. TO BETTER TELL THE FINANCIAL STORY.
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Items left for Phase 2 include:
As a result of feedback received on the Exposure Draft, the Board split this project into 2 phases. ASU 2016-14 is the culmination of Phase 1.
Whether to require a measure of operations
and how to define it
Potential realignment within the statement of
cash flows
ALSO: Segment reporting as a potential alternative to expense
analysis for HC
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Phase I Changes (Amendments to Current GAAP)
Allowing free choice between direct method and indirect method in presenting operating cash flows
• No longer required to present indirect method reconciliation if present direct method
Improving presentation and disclosures for net asset classes
• Streamlines net asset classes (with and without donor restrictions)
• Reemphasizes disclosure requirements about net asset restrictions
• Adds disclosure requirements about net asset designations
• Revises accounting/ augments disclosures for underwater endowments
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Phase I Changes (cont’d)
Enhancing information about the
liquidity and availability of
financial resources
• Qualitative information about how an NFP manages its liquid available resources and its liquidity risk
• Quantitative information that communicates the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year
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Quantitative Disclosure for Financial Assets Availability–Example
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234,410$
Restricted by donor with time or purpose restrictions (11,940) Subject to appropriation and satisfaction of donor restrictions** (144,500) Investments held in annuity trust (4,500) Amounts held by bond trustees (30,200)
Quasi-endowment fund, primarily for long-term investing** (36,600)
Amounts set aside for liquidity reserve (1,300) Financial assets available to meet cash needs for general expenditures within one year 5,370$
**Excludes amounts that have been appropriated for next 12 months that do not have purpose restrictions
Board designations:
Financial assets, at year-end*
Less those available unavailable for general expenditures within one year, due to:
Contractual or donor-imposed restrictions:
*Total assets, less nonfinancial assets (e.g., PP&E, inventory, prepaids)
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Phase I Changes (cont’d)
Providing better information about expenses and expense allocation
• Requires reporting of expenses by nature as well as by function, including an analysis (choice of location)
• Qualitative information about cost allocation• Improves guidance on allocation from M&G Expenses
Improving reporting of investment return
• Requires reporting net of external and direct internal investment expenses • Eliminates disclosure requirement for netted investment expenses, investment return components
Increasing transparency about effect of internal actions on operating measures (if reported)
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ASU 2016-14: Effective Date, Early Adoption, and Transition
Effective DateFor fiscal years beginning after
12/15/2017 (e.g., CY 2018, FY 2018-19)• Interim financials the
following year
Early AdoptionPermitted, but must
apply the regular transition provisions.
Transition• For year of adoption: apply
all provisions.• For comparative years
presented: apply all provisions, except can choose not to present:• Analysis of expenses by
nature and function, and/or
• Disclosures around liquidity and availability of resources
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Important Notes
NFPs are already permitted to incorporate many of the changes in the ASU
• Presenting one class of restricted net assets (consolidating temporarily and permanently restricted)
• Underwater endowment accounting• Eliminated disclosures of investment return components
and netted expenses• Eliminated requirement to provide indirect reconciliation if
using direct method for operating cash flows
The only changes that cannot be done without
formally adopting the ASU are:
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Other Recent ASUs and Projects in Progress
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Financial Instruments – Classification & Measurement Amendments to Current GAAP (ASU 2016-01)
Targeted improvements, effective CY 2019 (FY 2019-20):
Equity investments (other than those under the equity method) measured at each reporting period at fair value through net income, with key exception: those without readily determinable fair value only marked to observable price changes
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Fair value change resulting from own credit for financial liabilities measured under fair value option will be recognized through other comprehensive income (OCI)*
Entities other than Public Business Entities (includes all NFPs) no longer required to disclose fair value of financial instruments not recognized at fair value on B/S*
* Can early adopt these provisions
Financial Assets
Financial Liabilities
Disclosures
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Accounting for Financial Instruments – Credit Losses (ASU 2016-13; Topic 326)
• Focuses on what a reporting entity expects to collect, rather than on whether the loan/ other asset has “gone bad” (incurred loss model)• Considers past history, current conditions, reasonable expectations about
foreseeable future
At core of ASU 2016-13 is new Current Expected Credit Loss (CECL) Model
• For NFPs, would apply to trade receivables (such as patient receivables), loans receivable, and lease receivables, but not to pledges receivable• Likely already taking CECL considerations into account for such assets
CECL Model not expected to result in significant impact on most entities other than financial institutions.
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Accounting for Financial Instruments – Credit Losses (cont’d)
More noteworthy is the change to impairment (credit loss)
guidance for available-for-sale debt securities.
Allowance approach, rather than write-down approach: reversals
with market recovery.
Effective for CY 2021 (FY 2021-22)
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Simplification Initiative Objective
Reduce cost & complexity while maintaining or improving the usefulness of the information
Projects include narrow-scope items that the FASB can complete in the short term
Not always so SIMPLE!!
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Simplification Initiative—ASUs Issued
Eliminating the Concept of Extraordinary Items (ASU 2015-01)
Presentation of Debt Issuance Costs (ASU 2015-03)
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
(ASU 2015-05)
Disclosures for Investments in Certain Entities That Calculate NAV per
Share (ASU 2015-07)
Measurement of Inventory (ASU 2015-11)
Employee Benefit Plan Reporting (part 1) (ASU 2015-12)
Measurement-Period Adjustments (ASU 2015-16)
Balance Sheet Classification of Deferred Taxes (ASU 2015-17)
Equity Method of Accounting (ASU 2016-07)
Employee Share-Based Payments (ASU 2016-09)
Income Taxes on Intra-Entity Transfers of Assets (ASU 2016-16)
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Business Combinations: Measurement-Period Adjustments (ASU 2015-16)
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Restate prior year for adjustments to provisional acquisition-related amounts that have been identified after year end but within one-year measurement period
Reflect adjustment in the subsequent year but separately present or disclose what would have been the effect on the prior year
Current GAAP Simplification
Effective Date and Transition:• Public business entities: annual periods beginning after December 15, 2015, and interim periods within those annual
years• All other entities: annual periods beginning after December 15, 2016, and interim periods after December 15, 2017• Early adoption permitted; Prospective application
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Simplifying the Equity Method of Accounting
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Basis difference– The difference between the cost of an investment and the amount of underlying equity in net assets
Currently amortized
Increase in ownership– Entities previously accounted for on other-than-equity-method of accounting which now qualify to for equity method
Currently must use retroactive application of the equity method
Proposal Exposed: Remove consideration
of basis difference (removed from FASB agenda; potential PCC relook for private companies)
Remove retroactive application requirement (finalized as ASU 2016-07)
Current GAAP Simplifications
Effective Date and Transition for ASU 2016-07:•All entities: annual periods beginning after December 15, 2016, and interim periods within those annual years•Early adoption permitted; Prospective application
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Simplifying Accounting for Employee Share-Based Payments (ASU 2016-09)
Simplifications to the following areas are part of the final ASU:
Minimum statutory withholding requirements (classification, cash flow statement presentation)
Accounting for forfeitures
Accounting for income taxes upon award vesting/ settlement
Presentation of excess tax benefits on cash flow statement
Expected Term (nonpublic entities only)
Intrinsic Value (new opportunity) (nonpublic entities only)
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Effective Date and Transition: Public business entities: annual periods beginning after December 15, 2016, and interim periods within those annual years
All other entities: annual periods beginning after December 15, 2017, and interim periods after December 15, 2018
Early adoption permitted; Prospective, Retrospective, or Modified Retrospective application (varies by area)
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Simplifying the Balance Sheet Classification of Debt (In Progress)
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The term current liabilities is defined in Topic 210 (Balance Sheet) but the term noncurrent is not explicitly defined
Topic 470 (Debt) includes narrow-scope guidance on various debt transactions
Balance sheet classification is based on facts and circumstances as of the financial statement issuance date for some debt transactions and as of the balance sheet date for others
Current GAAP allows the application of judgement about intent and probability
Debt would be classified as noncurrent if one or both of the following criteria are met as of the balance sheet date: The liability is contractually due to be
settled more than 12 months (or operating cycle, if longer) after the balance sheet date
The entity has a contractual right to defer settlement of the liability for at least 12 months (or operating cycle, if longer) after the balance sheet date
Exception for defaults/ waivers SACs/ MACs reflected only when
triggered
Current GAAP Simplification
Project Stage: Exposure Draft expected Q4 2016
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Cash Flow Classification Issues (EITF Issue 15-F) (ASU 2016-15)
1. Debt prepayment or extinguishment costs2. Settlement of zero-coupon bonds3. Contingent consideration payments made after a business combination4. Restricted cash* (now Issue 16-A; final ASU to be issued shortly)5. Proceeds from the settlement of insurance claims6. Proceeds from the settlement of life settlement contracts7. Distributions received from equity method investees8. Beneficial interests in securitization transactions9. Application of the predominance principle
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* Sub-issues: amounts moved between unrestricted and restricted cash accounts; amounts deposited and paid directly from restricted cash accounts
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Improving the effectiveness of notes requires both:
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Disclosure Framework: Two Components
Appropriate exercise of discretion by reporting entities when assessing disclosure requirements
Phase I: Board’s Decision Process
Phase II: Entity’s Decision Process
Consistent considerations by the Board in each standard-setting activity
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Defined Benefit Plans
Fair Value Measurement
Income Taxes
Inventory
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• Application of Proposed Concepts (from 2014 ED) to Disclosures Relating to Four Initial Areas (at right): Exposure Drafts issued, to be redeliberated
• Redeliberate Proposed Concepts in the Disclosure Framework
Board’s Decision Process
• Exposure Draft on Assessing Materiality in Disclosures; public comment period ended in December 2015; still being redeliberated.
Entity’s Decision Process
Disclosure Framework – Next Steps
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Consolidation (ASU 2015-02)
Current Guidance
•Separate accounting model for limited partnerships and similar legal entities (810-20)
•Includes a presumption that a general partner (GP) controls and thus consolidates the limited partnership
•Substantive kick-out or participating rights must exist to overcome the presumption
Amendment
• Eliminates the separate accounting model for partnerships and similar entities, and the presumption of control by a GP
• ED proposed reinstating this just for NFPs (which are scoped out of VIE guidance).
• Adds for limited partnerships and similar legal entities that:
• They may qualify as Voting Entities if partners have substantive kick-out or participating rights over GP
• An LP with a controlling financial interest consolidates
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Specific Considerations for Not-for-Profits
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Some Other Noteworthy Projects in the PipelineAccounting for Goodwill (2 phases)
Accounting for Identifiable Intangible Assets Acquired in a Business Combination by a Public Business Entity or an NFP
Definition of a Business
Improving the Presentation of Net Periodic Pension/ Postretirement Benefit Cost
Accounting for Financial Instruments – Hedging
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Agenda Consultation
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FASB—Major Projects of the Future: Agenda Consultation
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Pensions and Other
Postretirement Benefits
Intangible Assets
Distinguishing Liabilities from
Equity
Reporting Performance and
Cash Flows
Recent Invitation to Comment (ITC) to solicit public feedback to help determine the next generation of major FASB projects
Described and asked questions about 4 topics identified by FASB’s advisory groups
ITC also asked respondents for other suggestions
Public roundtables in November and agenda decisions in early 2017.
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Staying Current
Best ways to stay current:
Sign up for electronic Action Alert
FASB on Twitter
www.fasb.org• Pages on FASB website for Private Companies and NFPs• Project summaries• FASB in Focus executive summaries• Podcasts• Webcasts
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Questions?
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